Responsibility Centers

What is a Responsibility
Center?
The Responsibility is the unit in the

organization that has control over costs,

revenues, or investment funds.

Responsibility
Centersfurther defined
It is an organization unit for which a

manager is made responsible.

The centers manager and supervisor
establish specific and measurable goals for
the responsibility center.
The goals should promote the long-term
interest of the organization.

The basic definition of a

responsibility center
Lowest organizational level at which

funds control functions are carried out.

Generally the same as divisions in an
operating component.

Attributes of a responsibility
center
It is like a small business, and its manager

is Asked to run that small business and

preserve the interests of the larger
organization.
Goals for the center should be specific and

measurable, and Should promote the long

terms interests of the organization and
should be compatible with other
responsibility center activities.

Input-Output Attributes
Most organizations use financial controls

cost, revenue, and profits, etc. However,

such measures are not applicable to all
units within an organization.
For example, how would you measure the

contribution of a production department? It

can only be done on a cost measurement
basis. How would you measure the
contribution of a sales department only
by revenue generated.

EFFECTIVENESS AND
EFFICIENCY
Effectiveness: It means how well the

responsibility center does its job- that is,

the extent to which it produces the
intended or expected results.
Efficiency: It is used in its engineering

sense that is, the amount of output per

unit of input. A responsibility center must
both be efficient and effective.

For accounting purposes,

responsibility centers have four
classifications:
Cost Centers
Revenue Centers
Profit Centers
Investment Centers

Cost Centers
Part of a business to which a

cost is allocated for the

purposes of strategic planning.
Cost centers can be large
divisions of a business,
departments, small teams, or
even individuals

Revenue Center
A Revenue Center is responsible for selling

an agreed amount of products or services.

It's manager is usually responsible to
maximize revenue given the selling price
(or quantity) and given the budget for
personnel and expenses.

Profit Center
Profit Centers are parts of a corporation that

directly add to its profit.

Managers are held accountable for both
revenues, and costs (expenses), and therefore,
profits.

Usually the different profit centers are

separated for accounting purposes so that the

management can follow how much profit each
center makes and compare their relative
efficiency and profit.

Investment Centers
An investment center is a classification

used for business units within an

enterprise.
The essential element of an investment
center is that it is treated as a unit which is
measured against its use of capital, as
opposed to a cost or profit center, which
are measured against raw costs or profits.

Investment Centers,
continued
The advantage of this form of

measurement is that it tends to be more

encompassing, since it accounts for all uses
of capital.

Incremental Analysis in the

Responsibility Center
Incremental analysis is used to find the

impact of changes in costs or revenues,

given a specific potential scenario.
Decisions involving incremental analysis
include the following:
Make or buy (Profit Center)
Sell or process further (Revenue Center)
Special order (Cost Center)
Changes in production and/or technology
(Investment Center)

Integrated Treasury
The word INTEGRATION means

consolidation or merger or centralization.

Opportunities are winding for the banks,
financial institutions, corporate and others,
which
would
result
in
intense
market/economy is integrating with the
global economy, it is needles to emphasize
need for integration of the micro level
units.
For example different segments within the
financial markets are almost integrated.
The financial markets which were earlier

The impact of the financial integration on CAC

can be summarized as follows:
Promotes competition resulting in better

quality products and services.

Improves quality and number of financial
assets as a result of greater liquidity and
deeper market.
Reduces margin and more efficient
allocation/ intermediation interest rates to
align with global interest rates differential
to reflect in foreign exchange forward rates
Avoids inducements for tax evasion and
capital opportunities fordiversion or
distribution of risk.

Need of Integrated Treasury

Management
Presently except couple-of treasuries,

almost all the treasuries of the public

sectors banks are operating in isolations.
There may be times that the forex and

domestic treasury of these banks might

have worked on different directions there
by neutralizing an advantageous position or
even adversely affecting the banks
financial position.